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Buy then
Build: How Acquisition Entrepreneurs Outsmart the Startup Game, by Walker
Deibel

Ever thought of going out on your own? Starting something new and
exciting? Become the next BIG THING? This energetic entrepreneurship is what
the nation needs!

However, startups have an inherent flaw: they mostly fail.

Even with overwhelming talent, outstanding early product trials, and an
all-star team, success is still unlikely. The reality is that somewhat more
than 99% of all startups either fail completely, or never really amount to much.

Even startups funded by venture capital (VC) – the ones every MBA
startup strives for – have a 75% failure rate, despite the quality of input
that comes with the funding. (Since VCs work on a portfolio of investments, the
25% might make the 75% failures irrelevant.)

Making it work

What makes Walker Deibel’s book so exciting is that there is a viable
alternative (good!) that he has succeeded at many times (better!) and that can
be tailored to your circumstances (best!)

Being an entrepreneur doesn’t necessarily mean taking a unique idea and
starting a business from the ground up. If you have never had a sudden moment
of insight which leads you to wanting your own startup, you can still
experience all the challenges and rewards that come with being an entrepreneur.

Acquisition entrepreneurship (AE), occurs when you buy a company and run
the business. This is becoming increasingly common in the US as interested parties
buy someone else’s startup company and run the business. 2016 saw an 8.6% annual
increase of this practice.

The AE is a combination of the existing small business’s profitable and
sustainable infrastructure, with the innovation and drive of an entrepreneur. Existing
companies already have customers, brand awareness, employees, and most
importantly, revenue and profits—everything a startup doesn’t have!

Simply by buying a company, typically one with revenues greater than $1m,
(about R8m in South African terms, based on purchasing power parity) you can remove
so much of the risk inherent to entrepreneurship.

This is a fresh approach that comes with a new mindset and skillset for entrepreneurs.
It involves skills such as managing, innovating, and growing the company from
day one.

AE is more affordable than you think. The opportunity of raising money
from a bank means that you get to own 100% of the company yourself.

"Like all business professionals, acquisition entrepreneurs need to
be a hybrid of investor and entrepreneur," explains the author. The
investor mindset needs to evaluate whether this is a good financial decision,
and to analyse the business opportunity. The entrepreneur has to simultaneously
focus on innovation.

As an entrepreneur, you will need to be looking for an opportunity that
is a fit for you, as well as something that has personal interest.

Know how you'll win

Gary Vaynerchuk, the Belarusian American online wine critic, took over
his parents’ liquor store. Seeing an opportunity to sell wine online, he took
revenues from $3m to $60m by applying his online marketing skills.

In South Africa, there are anywhere between 20 000 and 40 000 SMEs that are
worth investing in. Many, I suspect, are owned by people who are coming to the
end of their careers and who may be potential sellers.

To start on your AE journey, you will need to seriously begin the very
first step: clarify what you have financially and emotionally, and what you
want to own. The small business will be your investment vehicle which you must
be suited to and drive well, to allow you to finish big.

"Knowing why and how you will win before you start, is critical to
knowing what game you are looking for in the first place," the author
suggests. About a third of the variants for success are simple competencies of attitude,
aptitude, and action style.

Then you can choose the type of business you wish to own. Is it one that
is ‘eternally profitable’ because it serves a need that is very unlikely to go
away? These ‘cash cows’ generally have very small growth opportunity, but also
small threat of industry disruption.

A ‘turnaround’ is a tremendous place to create value if you are strong
in operations, and have a great understanding of financial reports and managing
cash flow. The company usually has fallen on hard times, but through re-engineering,
failure can be corrected – though not without many hard decisions and
heartache.

Acquisition with ‘high growth in revenue and earnings’ indicates a clear
demand for the product or service, and the company is doing well at delivering
it. If you can sustain growth it is desirable, because you are going to pay
more for the company, adding significant risk and debt in the acquisition
process.

A ‘platform company’ refers to the first company you purchase in a specific
industry, because you intend to grow it further through acquisition. The question here is "How will you grow
it?"

Some acquisitions will play well to your skill as an operational expert,
others to your marketing or sales prowess.

"You first identify your strengths, then match it to the growth
opportunity the potential acquisition offers," Deibel advises.

Identifying this clearly is the first part of what will become your
target statement, after which you can identify your target.

The critical part

Now that you know which type of company you want to purchase, you’ll
need to identify the target’s Seller Discretionary Earnings (SDE), the measure
of how much total cash flow the seller of the firm has been enjoying.

Defining what you want to acquire by revenue shouldn’t be how you define
your target, because to be an AE, what you are buying is the cash flow. This
should be a critical part of your target statement.

The author doesn’t place much store in the industry as the choice driver
for many people. "I believe that industries all have similar
characteristics and are more alike than different."

However, ‘limiters’ - what you will not get involved in, are required in
your target statement. This may be geographic relocation, or what you would not
own, for example a principle decision if you are a vegetarian.

A full and clear target statement, including how much you can invest, by
when you WILL have the acquisition, will greatly help you in your search.
Instead of having to search the internet where the quality companies are too
quickly snatched up, and only the weak and profitless reside, you can use
intermediaries.

They will be impressed by your preparedness – the full extent of which
is clearly spelled out in this well-constructed and practical book.

Readability Light
---+- Serious

Insights
High +---- Low

Practical High +--- Low

Ian Mann
of Gateways consults internationally on leadership
and strategy and is the author of Strategy that Works and Executive Update. Views expressed
are his own.